Lululemon Athletica Inc (LULU) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the lululemon athletica second quarter earnings results conference call.

This conference is being recorded.

For opening remarks and introductions, I would like to turn the conference over to your host, Jean Fontana with ICR.

Please go ahead.

Thank you.

Good morning.

Thank you for joining lululemon athletica's conference call to discuss second quarter fiscal 2009 results.

A copy of today's press release is available on the Investor Relations section of the Company's website at www.lululemon.com or alternatively as furnished on Form 8-K with the SEC and available on the commission's website at www.SEC.gov.

Today's call is being recorded and will be available for replay for 30 days shortly after the call in the Investor Relations section of the Company's website.

Hosting today's call is Christine Day, the Company's President and Chief Executive Officer, John Currie, the Company's Chief Financial Officer, and Chip Wilson, Founder and Chairman.

Before we get started, I would like to remind you of the Company's Safe Harbor language.

The statements contained in this conference call, which are not historical facts may deem to constitute forward-looking statements within the meaning of the Securities -- Private Securities Litigation Reform Act of 1995.

Actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC.

Now I would like to turn the call over to Christine Day, lululemon athletica's Chief Executive Officer.

Thank you, Jean, and good morning, everyone.

Thank you for joining us to discuss our second quarter results.

With me today are John Currie, our CFO, Sheree Waterson, our EVP General Merchandise Manager, and Chip Wilson, our Founder and Chairman.

Following my opening remarks, I will turn the call over to John, who will go through the financial details of the quarter and Chip will make some closing remarks.

At the halfway point of 2009, we see solid signs of recovering our business momentum.

The team has done an incredible job responding to the macro environment, while positioning us to take advantage of an upward swing.

As we have said before, we believe our performance continues to demonstrate the power of our brand, as well as our innovative product offering, effective market strategy and the strength of our management team.

Our comparable store sales declined 2% on a constant dollar basis, which was better than the negative mid-single decline we had expected and represents a nice acceleration over our first quarter performance.

Over the quarter, we did achieve a positive comp trend driven by increased traffic and we responded by increasing inventories by utilizing our quick turn process to deliver almost 800,000 incremental units to the summer line.

We also brought forward some of our fall merchandise modules.

The sell-through was very quick and we saw our comps rise and fall with product deliveries.

We believe that more product inventory could have resulted in a positive comp through the quarter.

As stated earlier, we managed our 2009 inventory buys with conservative outlook based on the macro environment and created the capacity to chain inventory through supply chain initiatives, flowing our inventory with better forecasting and shipping core items under a new replenishment model, color modules that could be moved either forward or backwards and a quick turn process to replenish items in two weeks to 45 days.

We have also seen improved flow of goods and reduced on-hand inventory at the stores and warehouse, as we have been able to annualize our system implementation and move beyond the basic functions and into the more sophisticated functionality of the merchandise management we implemented last year.

With our increased confidence and our sales momentum, we will rebuild our inventory levels for Q4 to create the opportunity for positive comp.

Q3 will still be a transition period where demand could outstrip supply, which could limit our sales upside, so we're guiding to a flat comp for the quarter.

Our earnings per share of $0.13 was aided by stronger sales, improved gross margin leverage on occupancy, and our ability to control our operating costs.

Our hard work on building a leaner operating model is producing stronger flow-through as sales momentum returns.

We are very pleased with our retail business in the quarter, particularly the strong response to our expanded running, organic cotton and natural fiber lines.

While the recession has created an environment where consumers have primarily been buying on sale, we've gained market share without resorting to markdowns and as discussed in our last call, we did not have a July clearance sale in our stores, but did hold one warehouse sale in Hamilton, Ontario.

Strategically, we have delivered more value to the consumer with higher quality, more technical functionality, key features, new colors and fabrics, all without increasing prices, and have reduced prices on key accessories to drive traffic while increasing availability of items such as tops for layering to standard offerings around the $50 to $70 price point.

Our strong community relationships and focus on healthy lives, combined with continuous flow of well designed, functional, high quality merchandise creates a justifiable purchase even to the cautious consumer.

In Q4 of this year and into 2010, we are planning to see leverage in our sourcing in order to work back towards our historical initial merchandise margin.

Our yoga mat program was very successful in driving sales of accessories and traffic and our new mats with stronger margins and attractive price points are arriving in the stores now.

We opened two stores in the quarter, Walnut Creek in California and NorthPark Center in Dallas.

Both stores have exceeded our expectations with strong openings.

For the year, we will open seven stores and two outlet stores.

Moving into Q3, we have opened Woodbury Commons outlet store and a new store in Coquitlam, British Columbia.

We have also entered the Phoenix market with our first store opening in the Biltmore with strong results.

Last quarter we announced the launch of our eCommerce site in April.

After the first quarter of operation, we are pleased to report strong sales results built with grassroots marketing via our internal social media strategies, and strong retail customer base.

We had over 1.5 million unique visitors to the site and an average order value of around $150.

As anticipated, we are also seeing strong interest in areas where we had show rooms, but no stores such as Phoenix, which gives us confidence in four of the stores in these areas.

We see our Canadian guests preshop the website and choose as the most convenient purchase venue -- our store or website -- and increasing overall traffic between the channels.

The site now offers over 90% of our total SKUs, so our guests can have the added convenience of being able to order almost any of our styles online.

As announced last week, we will open a new concept, ivivva athletica, which will focus on active young women from 6 to 12.

We see the market opportunity in Canada in this underserved market.

We will open three stores this year, two [okoko] store conversions in BC and one in Calgary, Alberta at Market Mall where the ivivva athletica store will be built out in our former lululemon site, as we will relocate to a new larger location.

With that, now I will turn it over to John to go through the financial details of the quarter.

John?

Thanks, Christine.

I'll begin by reviewing the details of our second quarter 2009 results, then I'll provide our outlook for the third quarter.

For the second quarter of fiscal 2009, total net revenue was $97.7 million, up from revenue of $85.5 million in the second quarter of 2008.

Increase in revenue was driven by 24 net new open stores since Q2 2008.

This more than offset the comparable store sales decline of 2% on a constant dollar basis and a weaker Canadian dollar, which had the impact of reducing reported revenue by $8 million or 8%.

During the quarter, we opened two corporate owned stores and closed one location.

We ended the quarter with 115 total stores versus 92 a year ago -- 104, which are corporate owned, and 11 which are franchises, including the six operating in Australia.

Our corporate owned stores represented 87% of total sales, or $85.1 million, versus 92% in the second quarter last year or $78.3 million.

Franchise and other revenues, which includes wholesale, show rooms, outlets, warehouse sales, and now eCommerce sales totaled $12.6 million, or the remaining 13% revenue for the second quarter.

eCommerce contributed $2.8 million in this its first full quarter of operations.

Gross profit for the second quarter was $45.2 million, or 46.2% of net revenue compared to $44.4 million or 51.9% of net revenue in Q2 2008.

The factors contributing to this 570 basis point decline were largely the same as it was impacting the gross margin in Q1 versus a year ago, including 260 basis points from the negative impact on product costs associated with the weakening of the Canadian dollar versus the second quarter of 2008, 140 basis points from occupancy and depreciation deleverage, and 350 basis points from a combination of strategic pricing initiatives, as we discussed on the call last quarter, cost to air freight product from our suppliers coupled with the use of higher cost quick turn strategies, both designed to provide products to meet higher sales demand, and lastly, we annualized some duty rebates, which increased gross margin in Q2 of 2008.

These were partially offset by 180 basis points of leverage gained from a reduction in costs associated with our production, design, merchandising, and distribution departments.

These factors impacted gross margin less than in Q1 of this year, where you may recall they reduced our gross margin by more than 1000 basis points to 42.8%.

This sequential quarter to quarter improvement of 340 basis points came primarily from fixed cost leverage gain from our stronger sales performance in Q2.

SG&A expenses were $30.8 million, or 31.6% of net revenue compared to $28.8 million, or 33.7% of net revenue for the same period last year.

Our noncorporate store SG&A was higher this quarter compared to the second quarter of 2008, due to the eCommerce launch and operating expenses associated with higher revenue in our other channels.

We also incurred approximately $1.5 million in one-time expenses, associated with the following -- $1 million dollars in legal costs associated with lease cancellation and various employment-related legal matters, and $500,000 in increased depreciation related to the retirement of legacy IT systems, which have now been replaced.

These expenses were offset by cost savings at our stores and in our store support center through labor, distribution, and logistics efficiencies combined with reduced discretionary expenses.

In addition, the weaker Canadian dollar reduced reported Canadian SG&A costs by approximately $2 million.

Operating income for the second quarter was $14.3 million, or 14.7% of net revenue compared to $15.5 million, or 18.2% of net revenue a year ago.

Tax expense was $5.1 million for the second quarter, or a rate of 35.6% versus 21.7% last year.

Last year, our tax rate was low, due to the recognition of tax savings associated with the US company's NOL from prior periods.

This quarter, our tax expense was higher than our expected rate of 34%, which is an estimate based on a blend of our statutory tax rates applicable in Canada and the US.

A higher than expected portion of our income this quarter came from our US operations, which are subject to higher tax rates than in Canada.

Net income was $9.2 million, or $0.13 per diluted share.

This compares to net income of $11.1 million, or $0.16 per diluted share for the second quarter of 2008.

Discontinued operations negatively impacted second quarter 2008 earnings by $1.2 million, or $0.02 per diluted share.

Our weighted average diluted shares outstanding for the quarter were 70.4 million, the same as a year ago.

Turning to the key balance sheet highlights, we continue to generate strong positive cash flow and have a healthy working capital position and no debt.

We ended the second quarter with cash and cash equivalents totaling $83.8 million.

Inventory at the end of the second quarter was $46.5 million, down $5.5 million, or 11% from $52.1 million at the end of our fiscal 2008.

The $3.1 million, or 7% higher compared to the $43.4 million at the end of the second quarter 2008.

Although our total inventory is higher, our average inventory per square foot has declined 22% year-over-year, as we added 24 net new stores since Q2 of 2008.

As Christine mentioned, we planned our inventory conservatively to be aligned with the economic climate at the start of the year.

As we saw demand outpace supply, we began to take some tactical steps towards building more inventory and readjusting inflows for later in the year.

Capital expenditures were $3 million in the second quarter, resulting from new store buildouts, existing store renovations, and IT capital expenditures.

Now I'll turn to our outlook for the third quarter of 2009.

This guidance assumes a Canadian dollar at $0.90 US compared to an average exchange rate of $0.91 in Q3 of 2008.

For the third quarter 2009, we expect comparable store sales will run relatively flat on a constant dollar basis compared to the third quarter of last year.

As Christine mentioned, we currently plan to open a total of seven stores during the fiscal year, with four of these openings in the third quarter.

We anticipate revenue for Q3 to be in the range of $95 million to $100 million.

Overall, we expect a similar gross margin in Q3 to that of Q2.

Merchandise margins are expected to improve with the changeover to our fall product mix, but higher occupancy costs as a percentage of sales related to new stores opening during the quarter and those scheduled to open in Q4 will contribute to deleverage on occupancy costs.

We'll also continue to incur air freight and quick turn costs to pull product forward to meet higher demand.

For the third quarter of 2009, we expect SG&A to continue to benefit from our operating efficiencies.

This will be offset by preopening expenses related to Q3 and Q4 lululemon and ivivva store openings.

We expect earnings per share in the range of $0.11 to $0.13 per share for the quarter.

This assumes a tax rate of 35% and 70.6 million diluted weighted average shares outstanding.

With that, I'll turn it over to Chip.

Thanks, John.

In summary, we love the direction of our business and we have a high degree of confidence in our business model.

We offer a high quality, innovative product and a unique store and eCommerce environment that excites the needs of our fitness and health-conscious customers.

We will continue to innovate and develop our offerings and enhanced infrastructure and maximize real estate opportunities which combine to keep our customers and shareholders excited about lululemon athletica.

Our performance demonstrates we are on the right track and our strategy as we grow our Company for the long-term success.

And now I'll pass it on to the amazing Christine Day.

Thanks, Chip.

With that, we'll make it open for questions.

(Operator Instructions) We'll take our first question from Michelle Tan with Goldman Sachs.

Hey, thanks.

I was wondering if you could -- and congratulations.

I was wondering if you could give us some color on some of the key drivers of the sales improvement you're seeing outside of the accessories category, and also any sense of magnitude in terms of how much more aggressive you're getting on inventory in third quarter to position for fourth quarter.

Thank you.

On the first one, we saw tremendous response to our running line.

Our shorts were just flying out the window and so we were very excited about that.

I think that's made us very excited about all the layering pieces for running and that's what we see really driving the business, as well as the yoga line continues to be incredibly strong for us and accessories do continue to drive sales and traffic, but I think in general what is we're excited about our community work that we've been doing, has really been driving awareness, as well as our social media.

We really believe we've gotten a lift into the stores from eCommerce, as well as traffic to eCommerce that's given us a lot more presence and awareness on the internet which we think has really driven sales with people preshopping and going in both in Canada and the States.

So, I think what we're most excited about is its traffic and then people have been really responding well to our product.

Inventory wise, we're working with the factories.

It takes a while to rebuild your inventories and make sure that you have the time with the factories to view that, given the time length it takes.

With our overall cycle being somewhere in the neighborhood of the eight months, so we've been rebuilding with them and that will happen more in Q4 than in Q3.

Q3 we'll still be deploying a quick turn process, which will allow us to get additional product in which will be somewhat situational.

We will look at is selling and bring in that product.

We have increased our base cloth, so we'll have basics available.

What we said for Q3 is that basically we expect it it will still be flat because we did plan the business down for the year, so even chasing just gets us back to a flat situation until Q4.

Okay, great.

Thanks, and good luck.

Thank you very much.

We'll take our next question from Lorraine Hutchinson with Banc of America, Merrill Lynch.

Thank you, good morning.

I was just hoping for some more details on your secondary line.

What kind of price points we should expect, which categories you expect to be prominent there, and will you develop a new logo or use the lulu logo for this?

Could you repeat the question for me?

(inaudible) If you wouldn't mind repeating the question for me.

No problem.

I wanted to hear a little bit more about ivivva, what categories you expect to be prominent in the stores, how you expect to price it and if you think you'll put a new logo on the products or use the lulu logo.

It will definitely be an entirely different concept from the same marketing.

The price will be about 30% less and we may even price by size so that the upper size of the -- of the 6 to 12-year-olds doesn't compete with the lululemon size 0s and size 2s.

It will -- basically where lululemon is more of a yoga/running line, this will be more of a gymnastics, dance driven maybe even equestrian type of influence, but, in the long run, I think we'll end up moving into the softer lines for that group because that's the big, that's the big volume, but not very fashionable.

So did that answer your question anything more?

The logo?

Yes, the logo--

Yes, the logos are different.

We recognize a lot of the reasons that the logo works for lululemon, and I won't go into detail because I don't want to tell anyone, but we've -- after looking at that for 10 years, we've developed a different logo for ivivva that will be specifically for the 6 to 12-year-old market.

Thank you.

And then any update on new store opening target for 2010?

For starting 2010?

Yes.

At this point in time, we plan on still continuing with what we disclosed last quarter, which is around the 15 range, and we feel comfortable that's probably the right rebuild into the marketplace, allowing our existing stores to continue to build, plus citing additional new stores, so we are very encouraged with the results of our strong store openings in the last quarter, which we think is very exciting.

Thank you very much.

Thank you.

We'll take our next question from Paul Lejuez with Credit Suisse.

Hey, guys, thanks.

Can you maybe run through some of the store metrics behind the comp, how is traffic running, transactions versus average ticket and also what you saw improve during the quarter, which of those metrics sounds like it might be transactions, but if you could confirm that.

And also just wondering if the eCommerce business is adding or dragging on earnings right now.

If so, by how much?

Thanks.

In terms of the comp drivers, as has always been the case, I mean pricing we haven't done much with, so the driver is really traffic.

Not a material change in terms of, averaging at retail or basket, pretty similar.

The comp has just been driven by the return of traffic.

In terms of eCommerce, as you'll recall, it's an outsourced model for the most part, so a lot of the costs are variable.

We have very little internal G&A.

We pay a variable fee to the supplier.

And therefore it is accretive.

It is profitable.

Great, and any color you can give on the US versus Canadian trend and regional differences within the US?

I think we're very encouraged by the overall results we're seeing.

As we hoped the NorthPark store in Dallas which historically had been one of our more challenged markets, as we've talked about before, sequencing our real estate strategy, making sure that we are opening in the right areas first when we hit our target demographic, we certainly did that in the NorthPark shopping center, saw an overall lift to the Dallas market.

That, combined, with a lot of the operational attention we've paid to that market.

So very encouraged, even in our underperforming markets about the rebound, and then I think surprisingly, making sure that in California or some of the economically distressed areas, we've actually seen very strong business there as well, and seeing recovery across all the markets in the US.

And then Canada has continued to be strong for us.

From a big picture perspective on that down 2 constant currency, can you talk which of the Canadian stores versus US performed better?

No, we don't break it out in that much detail.

All right, thank you, guys.

Good luck.

Thank you.

Thank you.

We'll take our next question from Edward Yruma with KeyBanc.

Thanks very much for taking my question, and congratulations.

Can you talk about the performance of your new outlet store and if you had to rethink our strategy given your constraints on inventory?

No, and the reason we've always chosen to -- really what's going to be a four corners strategy, we'll have one ultimately in the four corners of the US so we can move product out quickly and efficiently.

We very definitely say that it is our clearance merchandise.

We do not buy for that channel and what's available is what's available, which is why we record it in other, and it's not included in our comp gains or in our retail sales and it really is designed just to clear merchandise as we need to so we can maintain our full price strategy in our stores.

It's worked very well for us.

In Canada, we use the warehouse sales and very pleased with our response to that.

They are a marketing activity as much as they are anything else to our loyal guests in Canada, so we feel very comfortable with our outlet strategy and the fact that we've been moving more product through at full price.

Great, and one follow-up, if I may.

Can you also talk about the expenses associated with your new second concept and how that significantly that will weigh on the back half results?

Thank you.

There will be some G&A incurred preopening.

It will be, using round numbers, less than $0.5 million.

Got it.

Thanks.

Thank you very much.

And we'll take our next question from Janet Kloppenburg with JJK Research.

Good morning, everyone, and congratulations.

Thank you, Janet.

Couple of questions on the sales trend.

Did you see acceleration in both markets, Christine, as the quarter unfolded?

Or were there inventory constraints that you can call out that may have inhibited the comps as the quarter unfolded?

We did see both markets respond very strongly, and we probably starved the US a little bit more because of the sales trends being lower there.

So we've definitely see the increased traffic there.

We could have done a better job with product in the US.

But that said, we are very pleased with the sales momentum and results that we've seen there.

And we're going to, as we said, we're going to lean into it and believe we have positive momentum there.

What we really saw was when we delivered fresh new product in, we saw positive comps the days that it arrived and as soon as it ran out, we went back to a flat.

We believe that with more products, we could have hit a positive comp for the quarter.

And Janet, we don't give monthly comps, but there was a definite trend -- started off okay early in the quarter, gained momentum in the middle of the quarter and then we started running thin on product towards the end.

Okay, and, John, now that your cost structure is lower, can you give us an idea of the kind of SG&A leverage we could expect at -- as we go forward?

Let's say if comps start to turn positive, could we see some significant leverage, or do you think that you'll have to start spending more to keep -- to keep the business growing?

How should we be thinking about the SG&A line going forward?

We're still running at lower sales levels than we had been.

Yes.

And our existing G&A has the capacity to handle higher volumes.

Having said that, as we look forward to renewing growth, we will opportunistically add strength to the team as required.

So it's a difficult answer to give you a very precise number on.

Right.

[Don't] invest in renewed growth.

A lot of the question is coming from the occupancy deleverage, so I'm wondering if, can you -- can you -- what is the inflection point on comps to neutralize that deleverage effect?

In other words, do comps have to be up 3% in order to get the deleverage to neutralize, or--

-- all else being equal, yes, it's in that 3%, plus or minus range.

Okay, great.

And Christine, when you talk about sourcing better and improved systems, which should enable margins to expand, I was wondering, do you see in the future your product margins moving back to where they have historically been?

Yes, and I think we're very close now, except for some of the investments we've made in organic and some of the pricing decisions that we made.

We stated earlier that we would be working through those coming into the fall, so, really starting in the fall and into early next year, with this point in time we see us getting back on track early next year with all of those changes that we've made we'll regain the leverage in those categories.

So we're very confident in our ability to manage initial gross margin on the markup and of course the second part of that is the leverage.

And as we see sales momentum returning, we'll also see recovery on that side.

Okay, and my last question, if I may, is of the 15 stores that are opening next year or planned to open next year, are they all lulu stores, or will some of the girls stores be included in that as well?

That's just lululemon.

At this time, the ivivva stores, we're doing the three and then we'll see how those do and we'll decide on growth after that.

Okay.

So there may be more ivivva stores, but that's not in the -- that's not slated at this time?

No, and we just want to be clear.

Our primary focus is lululemon.

And, we see tremendous growth opportunity in lululemon.

We saw an attractive market opportunity developing and we took advantage of it with some real estate that we were transitioning anyways.

So, but we don't want to be distracted.

We do see it as a viable business opportunity that will be healthy and profitable, but our main focus is still lululemon.

Great.

Congratulations, again.

Thank you.

Thanks.

Thank you.

We'll take our next question from Sharon Zackfia with William Blair & Company.

Hi, good morning.

I wanted to talk through a little bit the inventory issues that arose as the second quarter went on and how you're looking forward to the holidays.

Maybe if you could give us some more color on what kind of upside you're building to for the fourth quarter.

I mean how much of this momentum are you preparing yourselves to capture?

And then from a cost perspective, are there any incremental costs that will be associated with the catching-up process that you're going through at this point?

I'll handle the second part first perhaps, because what you're already seeing is on Q2 and it's in our guidance for Q3 and to some extent Q4 is the cost is catching up.

Air freight and utilizing our quick turn strategies there are costs associated with that, hopefully diminishing later in the year and into next year, but that continues to be a factor.

In terms of how much upside, that would almost constitute guidance.

Well, I guess you're in an interesting position because your sales trends have started to improve.

So I mean essentially you're going to have to make a bet as to how you want to plan for the inventories for the holidays or is there -- how are you assessing the risk of maybe building the inventories to capture upside versus inventory obsolescence.

If you could give us some insight into the thought process.

Yes, so let me talk about the thought process without giving guidance, because John will kick me under the table if I try to do that.

So what we've done is we've increased -- we have increased orders for Q4 and we've done it in what we think are the healthiest products.

Historically we've run out of running in the December for gift-giving, which typically most people start training in January.

So for the marathons and the running season.

So what we've done is we've decided to bring those modules that we had for the first set, which we were planning on doing earlier in January, into the December period so that we have that product available to drop and if sales momentum doesn't materialize, we can move the running products back into that January.

So it will increase our inventory in the December period.

We feel it's a very low risk strategy because it's still fresh and our highest demand product that we have.

Sheree, do you want to add any color to that?

I'm really pleased because of the supply chain plan that we've done, we've been actually able to backfill into Q4 so that we can approach a healthier situation, which we think it will be closer to the increased demand that we're seeing.

Also, as Christine said, we have running modules that we've actually planned to bring in in December.

So our mix is looking healthier than it has before.

So I'm really pleased with the response that we've been actually able to have.

And finally, we have a gift giving strategy in Q4 that we've planned for that is different than what we've done in the past year that should assist not only our inventories, but meeting some of the demand that we left on the table prior.

Okay, and then when should we start to see the inventories build?

Will that start happening towards the end of the third quarter?

Is it really going to be more in November?

Yes, you'll see higher per square foot or however you want to measure it, you'll see higher inventories Q3.

Okay.

Thank you.

Thank you.

We'll take our next question from Liz Dunn with Thomas Weisel.

Hi, good morning.

Let me add my congratulations.

I guess you talked about returning to historic merchandise margins.

To what extent -- I guess what -- what can you do with reported gross margins?

Where can you get back to if currency is stable at these levels?

I mean I'm assuming that you probably can't get back to historic levels as reported gross margin with currency at these levels, or can you?

And where are you planning currency in your Q3 assumptions?

Then I also had a question about the 15 stores you plan to open next year.

Can you talk about which markets you'll be addressing?

Thanks.

Okay, so in terms of talking about gross margin, we should break it into buckets.

As Christine mentioned, we do expect to get back to our traditional merchandise margin by 2010.

Currency, in Q1, it was the biggest impact and as you'll recall, it was over 300 basis points negative to our gross margin.

The Canadian dollar has rebounded about half of what it lost.

Even though you don't -- you didn't see that come through immediately in Q2, and that's because it takes an inventory turn to show the benefit.

If the Canadian dollar stayed at $0.90, again, it's halfway back from where it was, so you think we gained back 150 basis points from what we lost in Q1, which is the 300.

Again, you saw very, very little of that coming through in Q2.

And then the last piece is the occupancy and depreciation.

It comes back with volume.

It also comes back as we sign new leases at more attractive lease rates relative to revenue targets.

And that's -- that will come back over time.

Okay, and I'm sorry, where are you planning it for 3Q?

What's your assumption?

Canadian dollar?

Where are we putting stores next year?

Well, the last question on this, the guidance assumes the Canadian dollars is at $0.90.

Okay, and then on the stores?

-- where it was last year.

Which is 91.

Sorry, the stores question.

Our -- we will primarily focus on continuing to infill our strongest markets and still pretty much a Coastal strategy.

We've got a lot of opportunities filling in from the northeast corridor, which will focus on, as well as the northwest.

So you won't see us stretching into too many new markets next year.

We'll continue feeding those markets as we have in the past, but really hitting the demand and the higher volume, higher density markets will be our strategy for next year.

Great, thanks.

Congrats, again.

Thanks.

Thank you.

We'll take our next question from Barbara Gray with Odlum Brown.

Thank you.

Congratulations, guys.

Great quarter.

Three questions here.

Can you talk about sales per square foot for this quarter versus a year ago?

Second, how many ambassadors are you up to?

And, third, with ivivva -- do you plan to add -- if the business success, do you plan to add the brand to the existing lulu stores and create stand-alone stores and what do you think could be the potential target of stores?

Just quickly on the sales per square foot, in the comp base, the sales per square foot this quarter were $1328 per square foot.

I actually don't have last year's number in front of me.

Would it be higher or lower than last year?

I'm guessing that's a bit lower -- which, you'd expect even without the economic downturn because we've added so many new stores in newer markets.

Okay.

Very healthy.

For the ivivva, as Chip stated, it's absolutely a stand-alone concept.

We are not into mommy and me mini outfits, again, it's lululemon.

We don't see it being integrated into our existing line in any way shape or form.

It really has its own strategy.

We do see it a little bit more mall-based as opposed to the stand-alone street concepts that we have with lululemon.

So, again, run very separately with its own strategy for stand-alone success in the marketplace addressing that target guest compared to lululemon, which has its own strategy as well.

Okay, and then the number of ambassadors you're at right now?

I don't know the number off the top of my head.

We have been growing the number of ambassadors across -- as well as increasing the amount of yoga classes we offer in.

So we'll have to get back to you with that number.

Okay, great.

Thanks so much.

Thank you.

We'll take our next question from Howard Tubin with RBC Capital Markets.

Oh, thanks.

Just a question on gross margin.

The piece of the decline related to the strategic price reductions you took, is that just carry-over from what you did in the first quarter?

Did you take any other -- anything new in the second quarter?

No, it's really just a continuation of the same strategies, which was give or take 200 basis points of the decline.

Got it, okay.

And then just -- actually, that's it.

Thanks.

Thank you.

We'll take our next question from Laura Champine with Cowen.

Good morning.

Using the 10-Q that you published this morning, it looks like your eCommerce business must be almost grotesquely profitable.

Am I reading that right with your operating margin from your other division.

And is that a sustainable level of profitability?

eCommerce is a very high margin even though we pay a healthy payment to our outsourcing partner.

There's a very healthy margin to eCommerce.

Now, remember, we don't allocate any internal costs in our retail unit at the operating margin level.

Got it.

Thank you.

Thank you.

We'll take our next question from Dana Telsey with Telsey Advisors.

Good morning, everyone.

Given the sales -- and congratulations.

Given the sales trends are showing such nice signs of improvement, how do you see your customer changing, whether it's age, frequency, men's business, and the difference between eCommerce and retail?

And then as you think about long-term operating margin potential of the business, given the new cost structure that you have and what's been going on in the real estate world, how do you see it?

Is this a 25% operating margin business in the future?

How do you look to it?

Thank you.

Let me take the guests and then I'll let John do the operating margin.

We see just generally increased traffic.

We see the guests relatively staying the same as we've discussed in the past, and I think that's the strength of the fact that we've trued up our real estate strategy with our guest strategy and who we attract and when.

So I think we're seeing a nice cross section of our target guests, plus building that bandwidth guest that we've talked about in the past.

So just generally growing in appeal and awareness through our community effort.

So that's what we're excited about, as it does have strong appeal, but we're staying right in that target guest that we've been looking for, which we think is the healthiest for the brand.

And in terms of operating margin -- and I'm glad you said long-term, because I don't want to give nearer-term guidance, but over time certainly we see the gross margin potential getting back over 50%.

I think we hit a high of about 53%, so in excess of 50% over time is possible, with SG&A leverage.

We do think if you ignore growth expenditures, this continues to be a business that can be in excess of 20% operating margin from that, of course, you deduct what you spend on growth.

And so, our targets are to run at a 20% operating margin, which is really what we've always targeted.

You also asked about eCommerce, Dana.

What we're seeing there is we're attracting unique -- new guests plus loyal guests, and both in eCommerce and in the stores, we see our guest shops, our most loyal guest shop as weekly, and who is always popping in for what's new.

I think that the other thing that we're pretty excited about is we see tremendous loyalty once somebody adopts the product.

They really stay with us and becomes a big part of their wardrobe, which is very exciting for us.

And Christine, do you see introducing new categories over the next year or making some categories bigger or smaller?

I mean clearly running has become enormous for us.

We do see making, more of the pipe growing in that direction, but really think focused on the healthy yoga business, which for us is the big end, and we have to stay focused on that core market.

We're seeing a really nice response to the organic line, so I think that gives us both the yin and yang of yoga -- meaning we have the soft, natural line plus we have the high performance line, and that has been really well responded to and brought back a lot of the traditional yoga shoppers to us, which has really strengthened that line.

So we definitely see both of those platforms continuing to be our mainstay and I don't think we need a lot of innovation to entice people in, other than the work we're doing with style, function and design within those product lines.

Thank you.

Thank you.

We'll take our next question from Richard Jaffe with Stifel Nicolaus.

Thanks very much.

I'm impressed with the ability to chase, to replenish as sales started to accelerate.

I was wondering if you could give us a little bit more insight into how that worked.

Obviously there was some air freight costs involved, but could you describe more about perhaps piece goods that were in reserves or production time that was made available, how you were able to respond to the market, accelerate your response time and your inventory turns.

Obviously a key facility this quarter and probably going forward.

This is Sheree Waterson.

We're really pleased again with the speed you just mentioned that we are able to respond to our demand.

There is no speed without planning, and so what we've done with our manufacturers is done some really smart raw materials planning so that we could rapidly turn out of Asia, as well as looked at some core strategies where we're actually able to have garments that are readily available to pull at any point.

In addition to that, we actually have a local strategy here where we are producing some goods in Canada.

So with all of these things running in parallel and our ability to pull forward these modules that Christine has talked about has allowed us to really respond.

Okay, thank you.

Thank you.

And we'll take our final question from Robert Samuels with Oppenheimer.

Thanks.

All of my questions have been answered.

Thank you very much.

And there appears to be no additional questions at this time.

I'll turn the conference back over to our speakers for any additional or closing remarks.

I'd like to thank everybody for joining us this morning and we're very excited about our business momentum and I think our positioning in the overall market and the way that we've been able to hold on to the values of the organization and to really build our business in a time that was very challenging for most retailers and very optimistic because of that of the future of the Company.

So thank you.

And this concludes today's conference call.

Thank you for your participation.